“Let Them Eat Credit”

“’Let them eat credit’ was a line written by Prof. Raghuram Govind Rajan, and it remains one of the cleverest that has yet been penned about the causes of The Great Recession.” Sanford Rose

Dolors & Sense

by Sanford Rose

KISSIMMEE Florida—(Weekly Hubris)—7/23/2012—“Let them eat credit” was a line written by Prof. Raghuram Govind Rajan, and it remains one of the cleverest that has yet been penned about the causes of The Great Recession.

The middle and lower classes, enduring a decade-long decline in median wages and salaries (while mean wages and salaries, inflated by the gains of the rich, rose), were offered cheap credit as a substitute for wage advancement.

They took it.

It then took them—and the country (and most of the world).

Unable or unwilling to make payments, they defaulted.

The loan principals were too high, often in substantial excess of the value of the underlying properties which, of course, was rapidly falling.

In retrospect, it was in the interest of those who owned the mortgages to re-write them to reflect depreciated values—an action that would have curbed future depreciation.

But the owners were dispersed. They did not speak with one voice. And those who represented them to the consumer, the loan-servicing banks, had a conflict of interest (their compensation depended on the size of principal balances).

Thus, for a long time, nothing was done.

Then there was, and still is, only a trickle of principal-modifying activity.

As suggested in last week’s posting, government action in the form of eminent-domain seizure was a feasible alternative.

That it was never seriously considered at the Federal level is first a forecasting failure. In the early period of The Great Recession, only a few fathomed its potential depth or correctly estimated its protracted duration.

But, more importantly, widespread mortgage revisions to reduce principal balances, which would logically follow the eminent-domain seizures, would have greatly reduced the inequalities of wealth that had been building in the economy.

The lower classes, unable to earn, were told to borrow. If, after borrowing, their debts were reduced, it would be as though they had earned what they in fact could not.

The borrowing of the early-to-mid-2000s might be viewed as a de facto redistribution of wealth. The re-mortgaging would have converted the de facto into the de jure. Therefore, even though it would have spared the country much grief, it was, and remains, except in token form, an impermissible action.